A Test of Steady-State Government-Debt Neutrality

Paul Evans

Economic Inquiry, 1989, vol. 27, issue 1, 39-55

Abstract: This paper investigates whether, in the steady state, the real interest rate is an increasing function of both government debt and government spending. Using data from the period between January 1981 and March 1986, the paper finds no evidence of such a relationship. These data afford an especially powerful test because the ratio of federal debt to trend output, which had fallen from 93 to 33 percent between January 1948 and December 1980, reversed course after the enactment of the Economic Recovery Tax Act, reaching 47 percent in March 1986. Copyright 1989 by Oxford University Press.

Date: 1989
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